Linear Regression Research Paper on Determinants Essay Example

not considered as an endogenous variable in economic models. Instead, they are often seen as a determiner of other variables. In this study, the researchers aim to establish imports as the dependent variable and select influential variables that significantly impact it. Based on these chosen variables, a model will be constructed.

The correlation between a country's wealth and its import levels is widely recognized in economic literature. More prosperous nations have the means to purchase a diverse range of goods, including foreign shoes, foods, and computers that are not made domestically. Consequently, they often spend more on these products in larger quantities. Despite boasting the highest GDP worldwide, America exhibits remarkably high import volumes. In contrast, countries with lower incomes experience lower import levels due to their limited financial resources. This restriction impedes their ability to acquire goods and services from outside their borders.

The purpose of this study is to examine the connection between income and imports using Gross Domestic Product (GDP) as an indicator of income. The researchers intend to create a regression model to investigate the correlation between GDP and imports, while considering an initial linear relationship between these variables.

The correlation between the size of the labor force and imports is significant. A larger labor force enables a country to increase national employment, which in turn allows for the purchase of foreign goods, services, and even foreign labor. China and the USA are prime examples of this relationship as they possess large labor forces and play crucial roles as importers in the global market. This study seeks to examine the connection between employment levels and import levels, an area that has

not been extensively explored in open-economy macroeconomics. Consequently, it highlights the necessity for a model capable of establishing this link.

The construction of the model takes into account other variables like public debt, foreign exchange, investment income, and the Gini coefficient. Although there is a dearth of economic models directly linking these variables to imports, they are theoretically related to it. These relationships are extensively explained in macroeconomic texts. The connection between the level of imports and income is widely recognized in economic literature and is frequently discussed as a positive relationship in economics classes.

Dornbusch et. al (2008) discusses the relationship between imports and income (Y) and the real exchange rate (R) in his book Macroeconomics. He emphasizes that an increase in income results in higher spending on imports. The real exchange rate, which represents the purchasing power of local currency, also impacts imports. However, measuring the relative values of R across countries is challenging due to its variation between goods and currencies. Therefore, the real exchange rate (R) will not be considered further in this study.
Additionally, Dornbusch introduces budget surplus as a variable in the model, which is determined by taxes, government expenditures, and transfers (TA, G, and TR). The study assumes that there is a linear relationship between budget surplus and the level of imports since part of the government's expenditure is allocated to foreign products. It is important to note that budget surplus (BS) can be negative as it is calculated by subtracting budget expenditures from budget revenues.

The researchers chose a variable closely correlated with BS, budget revenues, which is always positive, in order to enable transformations that require

positive values. Okun’s Law states that a country’s production level and employment rate are related. The Philipps curve, a specific graph, displays a functional relationship between the two. Modern research, as noted by Lindbeck and Snower (2002) in The Insider Outsider Theory and Gilles Saint-Paul in an issue of Economic Policy, has focused extensively on modeling using Philipps curves.